Income Investors Feast While Interest Rates Signal Recession
By: Tim McPartland,
Nearly everyday I look at the various portfolios that we have on the website as well as our personal accounts and smile. The vast amount of fear, on a global basis, has helped generate profits for income investors as investors from all over the world rush in and try to secure at least a modest amount of income in their portfolios as their government bonds have coupons that have negative interest rates attached to them. On the other hand we believe we are moving closer to a recession and we will be quite anxious to see the employment numbers this coming Friday. Recall that last month (May) only 38,000 new jobs were created which is a scary number. If we were to get another number like this, without significant revisions to last month’s numbers, we would start to get very concerned.
Looking at preferred stocks and exchange traded debt issues (baby bonds) of all qualities there are only a couple sectors that have performed poorly and they are the shipping and energy preferreds. Of course the number of preferred shares outstanding from energy companies is very limited as many of the companies have gone bankrupt or at the very least have suspended payments on their preferred shares. We intend to stay clear of all shipping and energy preferred issues–while they may survive long term they carry too much risk for our very conservative nature. Remember that it is our goal to have a return of 7% per year and to do so without huge amount of risky holdings. We realize that there are a number of nimble income investors that “trade”” on a regular basis and they can juice their returns, at least on a short term basis, but we neither have the time nor the desire to be traders.
The common stocks we own have mostly done fantastic (although we only own 5 issues) and we really would like to sell them and we would have by now if we had alternative investments to which we could deploy the funds. Our AT&T (NYSE:T) and Johnson and Johnson (NYSE:JNJ) just grind higher on almost a daily basis and while the current yields on the shares are meager they are better than nothing. It is more likely that we would sell poorly performing issues such as Emerson Electric (NYSE:EMR) and will do so tomorrow. If an issue has performed poorly in the past couple of years we do not want to own it when/if we head into a recession.
With the global economy not improving much, if any, we think investors should be extremely cautious. Better to hold too much cash than get caught up in a black swan event while chasing junky high yield securities. Our cash positions have built a bit as we have had some redemptions of securities we held and we continue to build cash in the month ahead as we wait for bargains. Remember our 7% target (on the Blended Income Model Portfolio) doesn’t require us to be wild and crazy income investors, just steady and consistent. We’ll let the nimble folks chase yield–at least until the day arrives where their holdings get caught in a low quality downdraft, which will cure their chasing—at least for a couple months.
Just remember that the 10 year treasury isn’t trading at 1.35% because we live in a wonderful economic world–there will be a reckoning sooner or later–but when it will happen no one knows. This means that you need to be in a position that you are going to be comfortable with when that day arrives.